Short Sellers and Corporate Disclosures

• In Event: Market Participants and Voluntary Disclosure

Abstract

We examine how short sellers affect corporate disclosures using a natural experiment. From May 2005 to July 2007, the SEC implemented a pilot program by randomly selecting one third of Russell 3000 stocks and removing the short sale price tests for these stocks (referred to as pilot firms), leading to lower short-selling constraint, without changing the requirement for other firms (referred to as control firms). We compare the change in corporate disclosures between the pilot and control firms during this period. With respect to good news forecasts, we find that compared to the control firms, the pilot firms become more likely to issue good news forecasts. With respect to bad news forecasts, we find that compared to the control firms, the pilot firms do not change the frequency of bad news forecasts, but they issue bad news forecasts in a more timely fashion. Overall, our evidence suggests that the reduction in short-selling constraint induces managers to enhance disclosures, especially in the case of good news.

Authors

• Xia Chen, Singapore Management University

• Qiang Cheng, Singapore Management University

• Ting Luo, Tsinghua University

• Heng Yue, Peking University